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For GCC governments, the COVID-19 pandemic has emphasized the importance of developing local food sources. Agricultural subsidies are a powerful tool to accomplish that objective, but there are several policy variants with some more effective than others. The prevalent type of agricultural subsidies in many countries is output-based, in which governments reward farmers for finished agricultural products. For subsidies to succeed, irrespective of their type, they need to adhere to three policy design principles: policy integration, controls and transparency, and environmental protection.
Structured correctly, agricultural subsidies can accomplish a range of policy objectives. They can ensure food security and social protection, enhance farmers’ productivity, stimulate exports, and speed disaster recovery. However, selecting the most appropriate subsidy scheme isn’t easy. In part, that’s because governments often lack good data about the impact of various subsidy schemes, the opportunity cost of alternative approaches, or even the administrative cost of running the programs. Moreover, any subsidy decision needs to consider the long-term sustainability of the program, its efficiency, and its fairness in allocating benefits among different stakeholders.
Broadly, the two main subsidy schemes are input-based (which lowers the purchasing cost of raw materials for farmers) and output-based (which pays farmers based on finished agricultural products). Our analysis of subsidies in many countries found a marked trend away from input-based in favor of output-based.
In recent decades, countries with large agricultural sectors, such as China and Russia, have shifted to output-based subsidies from input-based subsidies. Other countries that already have output-based subsidies in place, such as Canada and Turkey, have increased their reliance on them. For example, Turkey’s Ministry of Agriculture and Forestry pays farmers based on their production levels of certain crops, such as corn, cotton, rapeseed, and sunflower.
The shift to output-based subsidies is also under way in the GCC. Saudi Arabia recently embarked on a program that aims to lower subsidy levels for raw materials such as animal feed and instead support finished agricultural products. In the poultry sector, this approach could reduce hatchery inefficiencies, which currently lead to an average loss rate of roughly 20%.
The rationale for output-based subsidies is compelling: They generally increase efficiency and productivity across the agricultural value chain because they reward performance. When farmers have a clear target price for finished products, they know what they have to aim for.
By contrast, input-based subsidies can lead to inefficiency and environmental damage because they incentivize the use of resources, rather than effective, sustainable consumption of these resources. In India, for example, input-based subsidies have led to an overutilization of some resources, resulting in degraded soil and depleted groundwater.
Regardless of whether a government opts for input-based or output-based subsidies, a mixture of the two, or some other approach, it should use three principles for successful policy design:
The first principle is policy integration. Rather than applying subsidies in isolation, governments should integrate them with other agricultural policies as part of a broader agenda to develop the agricultural sector and make it self-sustaining. Rather than lasting indefinitely, subsidies should be designed to offer temporary support and ultimately become unnecessary.
The second principle is controls and transparency. As with any government spending initiative, subsidies are vulnerable to fraud and misreporting. For that reason, subsidy programs need to include mechanisms to identify fraud and other types of misuse. Technology is making it easier to detect such misconduct. For example, governments can now use electronic systems to verify self-reporting by farmers. Such controls do more than reduce fraud, they also generate positive effects. For example, subsidy controls provide ministries with more accurate and detailed information that empowers them to make better decisions about individual programs and overall agricultural development.
The third principle is environmental protection. Agricultural subsidies need to take into account environmental and sustainability considerations, with the goal of protecting the environment and ensuring the most efficient use of water and other resources. Water is a particular concern in GCC countries, which have a chronic water shortage. Intelligently designed subsidies can reward the efficient, prudent use of resources, potentially through technology, to ensure the long-term sustainability of the agricultural sector and environmental protection.
Agricultural subsidies are a powerful tool, but also a complex one. By focusing on these three principles, GCC governments can design the right policies for their needs, and ensure that subsidy programs generate the maximum possible impact.
About the authors
Salim Ghazaly and Roger Rabbat are partners, and Ousama El Ghazzi is a manager, with Strategy&, part of the PwC network.
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